Debunking Long-Only Commodity Investing

Dr Mauritz van den Worm, PhD

06 July, 2019

Overview

Rough Outline

  • Introduce the BCOM Index as long-only proxy
  • Define backwardation and contango
  • Curve impact of roll ajusted price series
  • Reconstruct long-only Index
  • Performance attribution during backwardation and contango
  • Improving the long-only Index
  • Alternative strategies
  • Polar Star Diversified Portfolio

BCOM Index

BCOM Evolution

BCOM Weights

Aggregated Weights

Curve Shape

Contango

Backwardation

The effect of roll yield - Corn

The effect of roll yield - Natural Gas

The effect of roll yield - Chicago Wheat

The effect of roll yield - Arabica Coffee

Index Proxy

Index Proxy vs BCOM

Index Proxy - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.09
Sortino Ratio 0.13
Omega Ratio 0.13
Skewness -0.53
Kurtosis 3.03
Risk Statistics
Annualized Std.Deviation 13.08
Maximum Drawdown 57.29
Month to Recover 134.00
Worst Month -20.78
Losing Months (%) 46.20
Average Losing Month -2.84
Loss Deviation 2.76
Return Statistics
Last Month -0.65
Year To Date 3.53
3 Month ROR -0.96
12 Month ROR -5.46
36 Month ROR -3.09
Total Return 41.32
Compound ROR 1.22
Best Month 12.64
Winning Months (%) 53.80

Index Proxy - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 12.64 21.98 32.33 40.84 67.44 87.54 144.48
Worst -20.78 -34.36 -45.42 -45.36 -39.97 -43.18 -48.08
Average 0.17 0.56 1.28 2.71 5.89 8.75 16.81
Median 0.26 0.70 2.57 2.51 2.94 3.44 8.96
Last -0.65 -0.96 -1.79 -5.46 -4.04 -3.09 -33.25
Winning (%) 53.80 56.18 59.94 58.01 56.11 54.07 62.54
Avg. Pos. Period 2.76 5.15 8.02 13.55 23.18 29.86 40.47
Avg. Neg. Period -2.84 -5.32 -8.81 -12.27 -16.22 -16.10 -22.71
# Of Periods 342.00 340.00 337.00 331.00 319.00 307.00 283.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-57.29 134 NA 2008-07-31 NA
-36.93 77 56 1997-06-30 2003-10-31
-9.54 14 12 2006-08-31 2007-09-28
-8.10 31 16 1991-11-29 1994-05-31
-6.02 4 3 2008-03-31 2008-06-30

Index Proxy Performance Attribution - WTI Crude Oil

Index Proxy Performance Attribution - Arabic Coffee

Index Proxy Performance Attribution - Corn

Long Backwardated Commodities

Basic Idea

  • Only take long exposure in those commodities whose curves are in backwardation
  • Define the spread

\[ S_{C,K} := P_{C,K} - P_{C,K'} \]

for each commodity \(C\) as the price difference between the front contract \(K\) and deferred contract, twelve months out from the front contract, \(K'\).

  • If \(S_{C,K}\) < 0 the curve is in contango
  • If \(S_{C,K}\) > 0 the curve is in backwardation

Long Backwardated - Equity Curve

Long Backwardated Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.47
Sortino Ratio 0.71
Omega Ratio 0.56
Skewness 0.51
Kurtosis 4.68
Risk Statistics
Annualized Std.Deviation 8.76
Maximum Drawdown 20.87
Month to Recover 133.00
Worst Month -10.51
Losing Months (%) 47.21
Average Losing Month -1.40
Loss Deviation 1.69
Return Statistics
Last Month -0.57
Year To Date -5.33
3 Month ROR -5.24
12 Month ROR -9.74
36 Month ROR -5.32
Total Return 215.45
Compound ROR 4.13
Best Month 13.94
Winning Months (%) 51.61

Long Backwardated Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 13.94 18.71 25.18 42.03 57.76 73.55 121.31
Worst -10.51 -16.11 -17.09 -17.05 -16.91 -14.97 -18.79
Average 0.37 1.14 2.35 5.00 10.91 17.29 34.20
Median 0.03 0.59 1.26 2.53 5.08 11.91 28.97
Last -0.57 -5.24 -5.33 -9.74 -4.50 -5.32 -18.79
Winning (%) 51.61 56.93 60.42 60.30 67.61 74.18 81.21
Avg. Pos. Period 2.00 3.93 6.39 11.64 18.88 25.05 43.99
Avg. Neg. Period -1.40 -2.58 -3.81 -5.08 -5.72 -5.01 -8.10
# Of Periods 341.00 339.00 336.00 330.00 318.00 306.00 282.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-20.87 133 NA 2008-07-31 NA
-17.72 27 13 2000-12-29 2003-02-28
-16.91 33 9 1997-06-30 2000-02-29
-9.11 50 26 1991-11-29 1995-12-29
-5.51 5 3 2004-11-30 2005-03-31

Short Contango Commodities

Short Contango Commodities - Equity Curve

Short Contango Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.12
Sortino Ratio 0.20
Omega Ratio 0.16
Skewness 0.90
Kurtosis 5.34
Risk Statistics
Annualized Std.Deviation 12.44
Maximum Drawdown 42.11
Month to Recover 85.00
Worst Month -12.32
Losing Months (%) 48.97
Average Losing Month -2.34
Loss Deviation 2.19
Return Statistics
Last Month -1.71
Year To Date -9.08
3 Month ROR -3.51
12 Month ROR -0.96
36 Month ROR 1.83
Total Return 53.30
Compound ROR 1.51
Best Month 22.19
Winning Months (%) 51.03

Short Contango Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 22.19 45.55 63.53 73.84 64.12 67.39 77.38
Worst -12.32 -17.27 -18.38 -22.24 -31.84 -32.13 -31.65
Average 0.19 0.62 1.34 2.72 5.13 7.88 13.44
Median 0.04 -0.12 -0.72 -0.75 0.05 2.37 9.97
Last -1.71 -3.51 -9.08 -0.96 -2.21 1.83 38.68
Winning (%) 51.03 48.67 45.83 46.06 50.31 55.88 62.77
Avg. Pos. Period 2.61 5.26 9.21 14.39 19.79 22.93 30.12
Avg. Neg. Period -2.34 -3.78 -5.33 -7.25 -9.72 -11.19 -14.68
# Of Periods 341.00 339.00 336.00 330.00 318.00 306.00 282.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-42.11 85 12 2002-02-28 2009-02-27
-35.67 81 51 2009-03-31 2015-11-30
-18.29 41 NA 2016-03-31 NA
-17.60 30 19 1999-03-31 2001-08-31
-14.51 79 49 1992-01-31 1998-07-31

Combination Portfolio

Basic Idea

Here we combine the two ideas

  • Take long exposure in backwardated commodities
  • Take short exposure in contango commodities
  • Keep the BCOM Index weights

Combinationi Portfolio - Equity Curve

Combination Portfolio - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.46
Sortino Ratio 0.80
Omega Ratio 0.51
Skewness 0.77
Kurtosis 3.91
Risk Statistics
Annualized Std.Deviation 13.27
Maximum Drawdown 27.72
Month to Recover 77.00
Worst Month -10.65
Losing Months (%) 43.57
Average Losing Month -2.53
Loss Deviation 2.19
Return Statistics
Last Month -1.71
Year To Date -14.39
3 Month ROR -9.35
12 Month ROR -8.88
36 Month ROR -7.35
Total Return 435.35
Compound ROR 6.06
Best Month 22.36
Winning Months (%) 56.43

Combination Portfolio - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 22.36 41.81 56.36 65.80 68.23 94.43 144.49
Worst -10.65 -13.79 -17.99 -18.51 -19.88 -24.06 -19.80
Average 0.56 1.73 3.56 7.42 15.90 26.06 50.39
Median 0.33 0.99 1.82 4.67 15.75 24.46 43.23
Last -1.71 -9.35 -8.99 -8.88 -1.38 -7.35 15.86
Winning (%) 56.43 56.76 60.53 65.86 77.12 82.41 93.99
Avg. Pos. Period 2.95 6.07 9.06 14.34 23.43 33.73 54.20
Avg. Neg. Period -2.53 -3.98 -4.87 -5.92 -9.48 -9.86 -9.16
# Of Periods 342.00 340.00 337.00 331.00 319.00 307.00 283.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-27.72 77 32 2009-03-31 2015-07-31
-20.61 44 NA 2016-01-29 NA
-20.31 56 25 1991-11-29 1996-06-28
-14.98 24 13 2002-01-31 2003-12-31
-11.56 14 12 2006-10-31 2007-11-30

Trend System on BCOM Commodities

Basic Idea

  • Use the Polar Star Trend System on a universe defined by the BCOM commodities
  • Added diversification by adding long and short positions in trending markets

Trend System on BCOM Commodities - Equity Curve

Trend System on BCOM Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.55
Sortino Ratio 1.23
Omega Ratio 0.64
Skewness 0.98
Kurtosis 2.75
Risk Statistics
Annualized Std.Deviation 23.44
Maximum Drawdown 42.13
Month to Recover 41.00
Worst Month -12.85
Losing Months (%) 46.04
Average Losing Month -4.17
Loss Deviation 3.02
Return Statistics
Last Month 0.66
Year To Date -0.78
3 Month ROR 0.82
12 Month ROR 13.73
36 Month ROR -24.21
Total Return 3003.21
Compound ROR 12.85
Best Month 32.35
Winning Months (%) 53.96

Trend System on BCOM Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 32.35 65.19 78.93 104.30 151.85 249.49 287.80
Worst -12.85 -18.22 -23.14 -25.26 -39.65 -35.82 -5.86
Average 1.23 3.69 7.58 15.62 33.31 55.17 109.09
Median 0.49 2.58 5.02 11.92 29.69 49.70 79.58
Last 0.66 0.82 -0.78 13.73 -9.90 -24.21 7.84
Winning (%) 53.96 59.59 61.90 70.00 81.76 85.29 97.87
Avg. Pos. Period 5.84 10.65 17.17 26.75 44.23 67.45 111.55
Avg. Neg. Period -4.17 -6.58 -8.01 -10.35 -15.64 -16.02 -4.18
# Of Periods 341.00 339.00 336.00 330.00 318.00 306.00 282.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-42.13 41 NA 2016-03-31 NA
-28.57 29 7 2001-11-30 2004-03-31
-25.79 22 5 2009-03-31 2010-12-31
-25.67 41 20 2011-05-31 2014-09-30
-25.02 22 6 2004-04-30 2006-01-31

Trend System on Extended Universe of Commodities

Basic Idea

  • Use the Polar Star Trend System on an extended universe of commodities

  • Diversification added by
    • Long and short positions in trending markets
    • Extended universe of commodities
    • Look at different parts of the curves

Trend System on Extended Universe of Commodities - Equity Curve

Trend System on Extended Universe of Commodities - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 0.82
Sortino Ratio 1.95
Omega Ratio 1.03
Skewness 1.53
Kurtosis 7.20
Risk Statistics
Annualized Std.Deviation 21.68
Maximum Drawdown 41.79
Month to Recover 47.00
Worst Month -11.32
Losing Months (%) 43.11
Average Losing Month -3.48
Loss Deviation 2.62
Return Statistics
Last Month 0.59
Year To Date 3.16
3 Month ROR 5.23
12 Month ROR 19.71
36 Month ROR 1.18
Total Return 10227.97
Compound ROR 17.73
Best Month 44.08
Winning Months (%) 56.89

Trend System on Extended Universe of Commodities - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 44.08 84.24 116.12 165.97 272.37 367.65 469.46
Worst -11.32 -15.25 -26.58 -28.72 -35.94 -37.96 -19.35
Average 1.55 4.79 9.96 21.13 46.60 77.05 155.78
Median 1.08 3.58 7.85 17.71 39.30 64.06 147.07
Last 0.59 5.23 3.16 19.71 10.30 1.18 44.71
Winning (%) 56.89 64.31 69.05 74.24 84.28 87.91 97.16
Avg. Pos. Period 5.37 10.59 17.90 31.87 58.18 90.04 160.69
Avg. Neg. Period -3.48 -5.68 -7.78 -9.83 -15.49 -17.39 -12.35
# Of Periods 341.00 339.00 336.00 330.00 318.00 306.00 282.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-41.79 47 14 2011-03-31 2015-01-30
-28.64 46 NA 2015-10-30 NA
-26.48 18 6 2004-08-31 2006-01-31
-19.32 20 2 2009-03-31 2010-10-29
-15.87 7 3 1993-06-30 1993-12-31

Polar Star Diversified Commodity Fund

Polar Star Diversified Commodity Fund - Equity Curve

Polar Star Diversified Commodity Fund - Risk and Return Statistics

Risk/Reward Statistics
Sharpe Ratio 1.33
Sortino Ratio 2.61
Omega Ratio 1.62
Skewness 0.16
Kurtosis 0.19
Risk Statistics
Annualized Std.Deviation 9.55
Maximum Drawdown 7.85
Month to Recover 10.00
Worst Month -5.31
Losing Months (%) 35.79
Average Losing Month -1.79
Loss Deviation 1.40
Return Statistics
Last Month 4.71
Year To Date 7.88
3 Month ROR 8.75
12 Month ROR 13.48
36 Month ROR 27.99
Total Return 157.01
Compound ROR 12.66
Best Month 8.36
Winning Months (%) 64.21

Polar Star Diversified Commodity Fund - Time Windown Report

Time Window Analysis:

1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Best 8.36 14.50 24.88 44.94 63.69 73.14 110.72
Worst -5.31 -6.11 -6.14 -2.80 -2.91 9.56 62.74
Average 1.04 3.03 6.11 12.19 26.35 44.01 80.27
Median 0.86 2.60 4.95 9.26 24.19 48.08 76.61
Last 4.71 8.75 11.38 13.48 30.19 27.99 67.81
Winning (%) 64.21 76.34 85.56 92.86 98.61 100.00 100.00
Avg. Pos. Period 2.61 4.78 7.66 13.22 26.76 44.01 80.27
Avg. Neg. Period -1.79 -2.61 -3.07 -1.19 -2.91 NaN NaN
# Of Periods 95.00 93.00 90.00 84.00 72.00 60.00 36.00

Drawdown Report:

Depth (%) Length (Months) Recovery (Months) Start End
-7.85 10 2 2016-10-31 2017-07-31
-6.11 5 2 2014-01-31 2014-05-31
-5.79 7 3 2015-12-31 2016-06-30
-5.31 4 3 2013-01-31 2013-04-30
-5.11 3 2 2013-08-31 2013-10-31

Polar Star Diversified Construction

  • Allocate to the three underlying USD funds
    • Polar Star Limited
    • Polar Star Spectrum
    • Polar Star Quantitative


  • Weights determined using
    • Bootstrapping procedure with expanding window
    • Determine baseline weightings
    • Black-Litterman
    • Add PM views
    • Rebalance quarterly

Bootstrapping Procedure

Black-Litterman